Study Notes

History and evolution of

Banking in India
1770 to 2021
Banking in India – 1770 to 2021

Pre-independence Era (1770-1946)

Presidency Banks
 The functions of the three Presidency banks - discounting of bills of exchange/other negotiable
private securities, keeping cash accounts and receiving deposits and issuing and circulating cash
notes. They functioned as quasi-central banks.
 Paper Currency Act, 1861, revoked the right to issue currency notes by Presidency Banks and the
 March 1862 - Government of India became sole issuer of paper currency within British India
 Presidency Banks Act of May 1876 brought the three presidency banks under a common statute.
 In 1921, they were finally merged to form Imperial Bank of India.

Other important events pre-independence

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Banking in India – 1770 to 2021

Independence till pre-nationalization of banks (1949-1962)

State bank of India (SBI)

 SBI was initially set up as three presidency banks (Bank of Calcutta, later known as Bank of
Bengal, Bank of Bombay and the Bank of Madras).
 In 1921, these three were merged in one entity called “Imperial Bank of India”.
 The Imperial Bank of India was nationalized in 1955 and was renamed State Bank of India.
 SBI was constituted under the State Bank of India Act 1955, for the purpose of taking over the
undertaking and business of the Imperial Bank of India followed by the formation of 7 associate
banks in 1959-60.
 In 1959, State Bank of India (Subsidiary) Act was passed. As per the act, seven subsidiary banks
of the SBI were nationalized as a major process of nationalization
 Later, these associate banks have been merged into SBI over the years as follows:

Associate Bank Merged with SBI in

State Bank of Saurashtra 2008
State Bank of Indore 2010
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Mysore
State Bank of Patiala 2017
State Bank of Travancore
Bharatiya Mahila Bank (was formed in 2013 with a vision of economic
empowerment for women)

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Banking in India – 1770 to 2021

Nationalization of Banks – 1969 and 1980

First Nationalisation – 1969

 The Government of India issued an ordinance and nationalised the 14 largest

commercial banks with effect from 19 July 1969 under then PM Indira Gandhi.
 All commercial banks with a deposit base of over ₹50 crore were nationalized and
together these banks accounted for 85% of bank deposits in the country.
 These 14 banks were
1. Allahabad Bank Merged with Indian Bank in April 2020
2. Bank of India
3. Canara Bank
4. Dena Bank Merged with Bank of Baroda in April 2019
5. Indian Overseas Bank
6. Syndicate Bank Merged with Canara Bank in April 2020
7. Union Bank Of India
8. Bank of Baroda
9. Bank of Maharashtra
10. Central Bank of India
11. Indian Bank
12. Punjab National Bank
13. UCO Bank
14. United Bank of India Merged with PNB in April 2020

Second Nationalisation – 1980

 The second round of nationalization of banks was done under Mr. I.G. Patel, the then
Governor of RBI.
 The Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1980,
was issued on 15 April 1980, under the signature of N. Sanjiva Reddy, the then
President of India
 The stated reason for the nationalization was to give the government more control of
credit delivery. With the second round of nationalisation, the Government of India
controlled around 91% of the banking business of India
 The six commercial banks that were nationalized were:
1. Andhra Bank Merged with Union Bank of India in April 2020
2. Corporation Bank
3. New Bank of India Acquired by Punjab National Bank in 1993
4. Oriental Bank of Commerce Merged with PNB in April 2020
5. Punjab and Sind Bank
6. Vijaya Bank Merged with Bank of Baroda in April 2019

So, by 1980, 21 banks were nationalized:

1. SBI in 1955
2. 14 commercial banks in 1969
3. 6 more commercial banks in 1980

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Banking in India – 1770 to 2021

Nationalized Banks as of February 2022

Mega PSU banks Merger: effective April 01, 2020 (announced in August 2019)

Source: pib.gov.in

As of February 2022, there are 12 nationalised banks as follows, after the mega merger of 6
banks (with effect from April 2020) by the Government:

S. No. Name of Bank Head Office

1 Bank of Baroda Vadodara
2 Bank of India Mumbai
3 Bank of Maharashtra Pune
4 Canara bank Bengaluru
5 Central bank of India Mumbai
6 Indian Bank Chennai
7 Indian Overseas Bank Chennai
8 Punjab National Bank New Delhi
9 Punjab and Sind Bank New Delhi
10 State Bank of India Mumbai
11 UCO Bank Kolkata
12 Union Bank of India Mumbai

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Banking in India – 1770 to 2021

Box 2: History of IDBI Bank Ltd

 IDBI Bank Limited (initially called Industrial Development Bank of India) was established in
1964 by an Act of Parliament
 It was established as a development financial institution, to provide credit and other financial
facilities for the development of the Indian industry.
 Initially it operated as a subsidiary of RBI but the ownership was later transferred to Govt. of
India in 1976.
 In 1995, government divested 25% shareholding in the bank.
 IDBI Bank has been instrumental in the establishment of various important institutes
including SEBI, National Stock Exchange of India (NSE), the National Securities Depository
Limited (NSDL), the Stock Holding Corporation of India Limited (SHCIL), CARE Ratings Ltd,
the Exim Bank, SIDBI and the Entrepreneurship Development Institute of India.
 IDBI was transformed from a development financial institution to a commercial institution
through Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 and
was renamed as IDBI Ltd.
 Subsequently, in September 2004, RBI incorporated IDBI as a 'scheduled bank' under the
RBI Act, 1934. Consequently, IDBI, formally entered the portals of banking business as IDBI
Ltd. from 1 October 2004. The commercial banking arm, IDBI Bank, was merged into IDBI in
2005.
 As of January 2019 IDBI bank has been acquired by LIC. LIC now holds the status of
promoter in the Bank, with 51% stake and the Government of India holds 46.46℅ stake in
IDBI Bank. IDBI Bank is a private sector bank.

Private Banks – 1991 onwards

 The ushering of new private sector banks in the Indian Banking sector dates back to the
Balance of Payments crisis in 1991.This crisis led to the demolition of the licence raj.
 The setting up of framework for fiscal reforms was led by then Finance Minister Mr.
Manmohan Singh under Prime Minister Narasimha Rao. While the parallel framework
for the new monetary policy including guidelines on licensing of new private sector banks
was given shape by then RBI Governor Mr. C Rangarajan.

1993-1994 - Following the recommendation of Narshimham Committee on financial sector

reforms, RBI issued banking licenses to 10 new banks in 1993 based on guidelines for licensing
of new banks in the private sector as follows:
S. No. Name of Bank Year Current status
1 HDFC Bank 1994 Largest private sector bank; Domestic-
Systematically important Bank (D-SIB)
nd
2 ICICI Bank 1994 2 largest private sector bank; D-SIB
3 Axis Bank (as UTI Bank 1993-94 Renamed Axis Bank in 2007 and now the third
Ltd) largest private sector bank

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Banking in India – 1770 to 2021

4 Indusind Bank 1994 Acquired MFI Bharat Financial Inclusion Ltd in

5 IDBI Bank
6 Development Credit Bank
7 Global Trust Bank
8 Bank of Punjab
9 Centurion Bank
10 Times Bank
2019
Merged with IDBI Ltd in 2005 and owned by LIC
since 2019
1995 Renamed To DCB Bank Ltd in 2014
1994-2004 Merged with Oriental Bank of Commerce in 2004
1994-2005 Acquired by Centurion Bank in 2005
1995-2008 The merged Centurion Bank of Punjab was
acquired by HDFC Bank in 2008
1994-2000 Merged with HDFC Bank in 2000

2001 - In 2001, RBI revised the guidelines for new bank licences and two new banks were given
license as follows:
S. No. Name of Bank Year Current status
1 Kotak Mahindra Bank 2003 Acquired ING Vyasa Bank in 2015
th
2 Yes Bank 2004 4 largest private sector bank

2014 - In 2014 RBI granted license to two more banks in private sector:
S. No. Name of Bank Year Current status
1 IDFC Bank 2014  Started operations in 2015 as Universal Bank;
 NBFC, Capital First Ltd merged with IDFC
Bank to form IDFC First Bank since Dec 2018
2 Bandhan Bank 2014  Started operations in 2015 as Universal Bank
 Headquartered in Kolkata

2016 – RBI introduced on-tap licensing policy for grant of universal bank licenses subject to
fulfillment of requirements for a universal bank in August 2016. Some key features of the on-tap
licensing policy are:
 Eligible promoters - resident individuals and professionals having 10 years of
experience in banking and finance at a senior level
 Requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory
for individual promoters or standalone promoting/converting entities; in case of other
group entities, bank to be set up through NOFHC only in which at least 51% stake is
owned by promoters
 Minimum paid-up voting equity capital/ net worth to set up new universal bank =
Rs.1000 crore (increased from Rs.500 crore)
 Promoter/NOFHC holding – minimum 40% for initial 5 years and shareholding to be
brought down to 26% within 15 years of commencement (cap increased from 15%
initially)
 Non-promoter shareholding capped at 10% of the paid-up voting equity share capital of
the bank in case of natural persons and non-financial institutions/entities and at 15% of
the paid-up voting equity share capital of the bank in case of all categories of financial
institutions/entities, supranational institutions, public sector undertaking or Government.
 Banks to be listed within six years of commencement of operations
 FDI limit – 74%

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Banking in India – 1770 to 2021

2020 – In November 2020, Lakshmi Vilas Bank (LVB), a private sector bank established in
1926 in Karur, Tamil Nadu, was merged with DBS Bank India Ltd. DBS Bank India Ltd is a
wholly owned subsidiary of DBS Bank Ltd, Singapore (“DBS”), which in turn is a subsidiary of
Asia’s leading financial services group, DBS Group Holdings Limited.

As of February 2022, there are 21 private sector banks operating in India (10 new and 11
old).

Early Differentiated Banks

 Differentiated banks are the banks that are licensed by the RBI to provide specific
banking services and products or to cater to certain specific customers/areas.
 In that sense, the Regional Rural Banks (RRBs), Local Area Banks (LABs) and the
Urban Co Operative Banks (UCBs), could be considered as the first forms of
differentiated banks as they operate in localized areas.

1. Regional Rural Banks (RRBs)

 established under the provisions of RRB Act, 1976 to provide sufficient banking
and credit facility for agriculture and other rural sectors
 set up on the recommendations of the Narasimham committee
 There were 43 RRBs as of February 2022.

2. Local Area Banks (LABs)

 introduced in August 1996

 set up as private local banks with jurisdiction over two or three contiguous
districts
 To bridge the gaps in credit availability and strengthen the institutional credit
framework in the rural and semi-urban areas
 As of February 2022 there are two LABs operational:
1. Coastal Local Area Bank Ltd
2. Krishna Bhima Samruddhi LAB Ltd
 Note - Subhadra Local Bank Ltd’s license was cancelled by RBI in Dec 2020.

3. Urban Cooperative Banks (UCBs)

 UCBs were brought under the provisions of the Banking Regulation Act, 1949
w.e.f. March 1, 1966
 In June 2020, the government amended the Banking regulation Act to give the
complete regulation of UCBs to RBI.
 In Feb 2021, RBI set up of an eight-member expert committee, headed by former
RBI Deputy Governor NS Vishwanathan, on urban co-operative banks (UCBs) to
examine their issues and provide a roadmap for strengthening the sector.

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Banking in India – 1770 to 2021

New Differentiated Banks – 2014

 In 2014, the Nachiket Mor committee on financial inclusion setting up of new

differentiated banks like Small Finance Banks and Payments Banks

1. Payments Banks
o In August 2015, the RBI gave licenses for 11 Payment Banks; however, only 6
are operational as of August 2019:

S. No. Name of Payments Bank Year

1 Airtel Payments Bank Ltd Nov 2016
2 India Post Payments Bank Ltd 2017 on pilot basis and full basis in Sep
2018
3 FINO Payments Bank Ltd May 2017
4 Paytm Payments Bank Ltd Jun 2017
5 Jio Payments Bank Ltd April 2018
6 NSDL Payments Bank Limited Oct 2018
7 Aditya Birla Idea Payments Feb 2018; closed now
Bank Ltd.
o Three applicants surrendered their respective license, being Cholamandalam
Distribution Services Limited, Shri Dilip Shantilal Shanghvi (of Sun Pharma) and
Tech Mahindra Limited.
o Vodafone M-Pesa Limited had also received licence but was being merged with
Aditya Birla Idea Payments bank; as of now both are discontinuing the payments
bank business.

2. Small Finance Banks

o In Sep 2015, 10 Small Finance Banks were given licenses of which 9 were
microfinance institutions while one was a local area bank
o In December 2019, RBI issued on-tap licensing guidelines for small finance
banks in the private sector.
o UP headquartered, Shivalik Mercantile Co-operative Bank is the 1st UCB to
be granted license from RBI to convert into SFB. It was granted approval in
January 2020 and commenced operations from April 2021.
o In October 2021, RBI granted SFB licence to Unity SFB. It is promoted by a
consortium of BharatPe and Centrum Financial Services. The SFB also took over
Punjab & Maharashtra Cooperative Bank Ltd (PMC Bank).

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Banking in India – 1770 to 2019

Overview of Indian Banking (as of February 2022)

RESERVE BANK OF INDIA

Scheduled Unscheduled
Banks Banks

Cooperative
Commercial Banks Banks

Urban Co-op
Public Sector SBI + 11 Nationalised Banks
Banks (12) Banks

10 new + 11 old Rural Co-op

Private Sector Banks
Banks (21) private sector banks

Regional Rural
Banks (43)

Foreign Banks
(44)

Local Area Bank

(2)

Small Finance
Banks (12)

Payment Banks
(6)

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